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Think globally, borrow locally

BORROWING foreigners' money is one thing. Borrowing in their currency is quite another. Prior to the Asian financial crisis in 1997, the region's economies borrowed heavily in dollars. When capital took fright and fled the region, policymakers faced an awful dilemma. They could either raise interest rates to the roof to stem the capital outflow, thereby bankrupting corporate borrowers; or they could let their currency plunge through the floor, thereby bankrupting any borrower cursed with serving dollar debts from local-currency revenues. In the years since, Asian economies have learned their lesson. They have accumulated impressive amounts of foreign-exchange reserves. And both governments and firms have issued increasing volumes of bonds in their own currency. The amount of local-currency debt reached $6.5 trillion last year (see chart), according to the Asian Development Bank, which published its annual outlook on April 9th. By borrowing in local currency, a country becomes more resilient to exchange-rate mayhem. But it will only find takers for its local-currency bonds if it can convince them that the risk of mayhem is slight.

Readers' comments

As I've written before, small countries with their own currencies have the right to protect themselves from hot money by prohibiting loans in foreign currencies, and requiring that those who choose to put money in will have to remove it in a measured way.
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Allow me to quote FT Alphaville as linked to by Link Exchange 28 Mar 13
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"The issue of how to deal with potentially destabilising flows isn’t a binary question of capital controls, yes or no but rather of how."

"But it will only find takers for its local-currency bonds if it can convince them that the risk of mayhem is slight"
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Not true. This is more pertinent for foreign buyers of lcy bonds. In general Asia has simply deregulated and tapped on retail savings, whether via money market funds or indirectly via banks.